Tech sector’s post-Brexit concerns

Before the Brexit referendum in June 2016, the UK tech sector was clearly in favour of staying within the European Union. A pre-vote survey among tech companies found overwhelming support for the Remain position (94%). Of all respondents, 58% said that Brexit would ‘damage London’s position as a global tech hub’, although 24% said there would be little impact.

A year later, Sterling has fallen 15% against the US dollar and 13% against the Euro. The UK has seen the lowest number of tech-based immigrant applications for many, many years. There is still much uncertainty as to what agreement will be reached by March 2019, and particularly whether UK companies will have tariff-free EU market access.

It’s understandable, therefore, that UK tech companies have considerable concerns about the future – particularly in relation to regulations, investment and people. Key issues were raised at a recent Westminster eForum, focused on the tech sector.

Time pressure

Brexit negotiations are to be conducted under a tight timescale. Michel Barnier has indicated a desire for an outline agreement by the end of 2017 and a completed deal sent to the European Parliament for consideration in autumn 2018. This is ambitious – even Greenland, with only 40,000 people, took three years to agree its relationship with the EU.

Given the mass of regulations, policies and treaties that need to be considered, the most likely outcome will be a transitional period to enable rules to become UK law as part of the Great Repeal Bill. However, the basic outline of the Brexit deal will need to be presented in the next 12 to 18 months.

Data in the spotlight

Data regulations, specifically the General Data Protection Regulations (whose compliance deadline is less than 12 months away in May 2018), will impact companies’ ability to hold, manage and access data. Around 12% of global data currently passes through the UK, which is a leader in cross-border connectivity. Safeguarding the UK’s leading position will be of paramount importance. There is a risk that service providers could consider crossing the channel. The new French President, Emmanuel Macron, is making all the right pro-EU noises to suggest that France will consider relaxing previously held principles (reducing corporation tax, encouraging tech start-ups and wooing back its expat community) in order to position itself as the central player in the tech sector.

Investment worries

The European Investment Fund (EIF) has played a hugely significant role in supporting UK tech companies. Approximately 30% of tech funding has gone to UK businesses, but this could change as Brexit negotiations get going. The EIF committed almost £2 billion to UK-based venture capital firms between 2011 and 2015, but Seedcamp, Hoxton Ventures and Episode 1 Ventures have all recently been denied funding at the due diligence stage. The EIF has either rejected funds since Article 50 was triggered or is continuing to stall on a decision, creating the feeling that the UK is being ‘frozen out’.

A loss of EIF support would create a large hole in funding and hurt tech sector VCs: they need such a stimulus when seeking to encourage other investors to participate in fundraising. Pressure is likely to increase on the British Business Bank to fill the funding gap left by the EIF. Although the UK Government contributes heavily to the EIF, the recent Conservative manifesto suggested a redirection of these funds in order to support UK VCs more directly. However, the tech sector expects there could be a long wait before this cash boost comes through, with cynics suggesting that funds may ultimately be redirected to offset the Brexit divorce bill.

Access to people

Freedom of movement is a key area of both concern and hope for the tech sector, which has a high demand for skilled, innovative individuals and sees EU talent as a valuable resource on which to draw. There are 550,000 foreign workers in the UK, a third of these from the EU. A fifth of new tech start-ups are formed by EU migrant entrepreneurs. Tech businesses are concerned that if they lose access to the EU talent pool, the industry will begin to falter just when its innovation is needed most. 

Given the lack of a majority government in the UK, negotiations could take on a more conciliatory tone, with the freedom and rights of EU citizens in the UK being safeguarded. However, removal of the laborious application process (the 85-page questionnaire) for new migrants seeking permanent residence in the UK will be of paramount importance for the tech and other sectors that rely on EU personnel. So will renewed encouragement for talent from the continent (and elsewhere) to come to the UK. Many individuals and bodies, including TechUK, continue to lobby the Government about the need for access to talent. Many feel the Government needs to demonstrate an empathy with the sector if it is to stop, and ideally reverse, the skills drain that has already begun.

Opportunities

One area of government working hard for the tech sector is the Department of International Trade (DIT), which is actively promoting tech companies across the globe. Few, if any, of its trade delegations have visited EU countries, however. Most have been to South Korea, Japan, China and Singapore, with one trip to Australia planned in the coming months.

It would be incorrect to suggest that the DIT believes Europe is not worth the time and effort. Foreign direct investment from the UK into Europe is 50% higher than UK investment into any other country. In general, the DIT, through its global activities, is promoting Britain as open for business, an indication that it sees encouragement towards world trade as highly worthwhile at the present time.